[Congressional Record Volume 147, Number 115 (Thursday, September 6, 2001)]
[House]
[Pages H5442-H5445]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
THE U.S. DOLLAR AND THE WORLD ECONOMY
The SPEAKER pro tempore. Under the Speaker's announced policy of
January 3, 2001, the gentleman from Texas (Mr. Paul) is recognized for
60 minutes as the designee of the majority leader.
Mr. PAUL. Mr. Speaker, I have taken a Special Order today to address
the subject of the U.S. dollar and the world economy, and in the words
of James Madison, the pestilent effects of paper money.
Mr. Speaker, Congress has a constitutional responsibility to maintain
the value of the dollar by making only gold and legal silver tender and
not to emit bills of credit, that is, paper money. This responsibility
was performed relatively well in the 19th century despite the abuse of
the dollar suffered during the Civil War and despite repeated efforts
to form a Central Bank.
This policy served to maintain relatively stable prices, and the
shortcomings came only when the rules of the gold standard were ignored
or abused.
In the 20th century, however, we saw the systematic undermining of
sound money with the establishment of the Federal Reserve System in
1913 and the outright rejection of gold with the collapse of the
Bretton Woods agreement in 1971. We are now witnessing the effects of
the accumulated problems of 30 years of fiat money, not only the dollar
but also all the world currencies, something the world has never before
experienced.
Exactly how it plays out is yet unknown. Its severity will be
determined by future monetary management, especially by the Federal
Reserve. The likelihood of quickly resolving the deeply ingrained and
worldwide imbalances built up over 30 years is remote. Yielding to the
addiction of credit creation, as has been the case with every market
correction over the past 30 years, remains irresistible to the central
bankers of the world. Central planners who occupy the seats of power in
every central bank around the world refuse to accept the fact that
markets are more powerful and smarter than they are.
The people of the United States, including the U.S. Congress, are far
too complacent about the seriousness of the current economic crisis.
They remain oblivious to the significance of the U.S. dollar's fiat
status. Discussions about the dollar are usually limited to the
question of whether the dollar is now too strong or too weak. When
money is defined as a precise weight of a precious metal, this type of
discussion does not exist. The only thing that matters under that
circumstance is whether an honest government will maintain
convertibility.
Exporters always want a weak dollar; importers, a strong one. But no
one demands a stable, sound dollar, as they should. Manipulation of
foreign trade through competitive currency devaluations has become
commonplace and is used as a form of protectionism. This has been going
on ever since the worldwide acceptance of fiat money 30 years ago.
Although some short-term advantage may be gained for certain
manufacturers and some countries by such currency manipulation, it only
adds fuel to the economic and financial instability inherent in a
system of paper money.
Paper money helps the strong and hurts the weak before it self-
destructs and undermines international trade. The U.S. dollar, with its
reserve currency status, provides a much greater benefit to American
citizens than that which occurs in other countries that follow a very
similar monetary policy. It allows us to export our inflation by buying
cheap goods from overseas while our dollars are then lent back to us to
finance our current account deficit. We further benefit from the
confidence bestowed on the dollar by our being the economic and
military powerhouse of the world, thus postponing the day of reckoning.
This permits our extravagant living to last longer than would have
otherwise occurred under a gold standard.
Some may argue that a good deal like that should not be denied, but
unfortunately the piper must eventually be paid. Inevitably the
distortions such as our current account deficit and foreign debt will
come to an end with more suffering than anyone has anticipated.
The monetary inflation of the 1990s produced welcomed profits of $145
billion for the NASDAQ companies over the 5 years between 1996 and
2000. Astoundingly, this entire amount was lost in the past year. This
does not even address the trillions of dollars of paper losses in stock
values from its peak in early 2000. Congress has expressed concern
about the staggering stock market losses but fails to see the
connection between the bubble economy and the monetary inflation
generated by the Federal Reserve.
Instead, Congress chooses to blame the analysts for misleading
investors. The analysts may not be entirely blameless, but their role
in creating the bubble is minimal compared to the misleading
information that the Federal Reserve has provided with artificially low
interest rates and a financial market made flush with generous new
credit at every sign of correction over the past 10 years.
By preventing the liquidation of bad debt and the elimination of
malinvestment and overcapacity, the Federal Reserve's actions have kept
the financial bubble inflated. Of course, it is an easy choice in the
short run. Who would deliberately allow the market tendency to deflate
back to stability? That would be politically unacceptable.
Talk of sound money and balanced budgets is just that. When the
economy sinks, the rhetoric for sound policy and a strong dollar may
continue, but all
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actions by the Congress and the Fed will be directed toward reinflation
and a congressional spending policy oblivious to all the promises
regarding a balanced budget and the preservation of the Social Security
and Medicare Trust Funds.
But if the Fed and its chairman, Alan Greenspan, have been able to
guide us out of every potential crisis all the way back to the stock
market crash of 1987, why should we not expect the same to happen once
again? Mainly because there is a limit to how long the monetary charade
can be perpetuated. Now it looks like the international financial
system built on paper money is coming to an end.
Modern day globalism since gold's demise 30 years ago has been based
on a purely fiat U.S. dollar with all other currencies tied to the
dollar. International redistribution and management of wealth through
the IMF, the World Bank, and the WTO have promoted this new version of
globalism. This type of globalism depends on trusting central bankers
to maintain currency values and the international institutions to
manage trade equitably, while bailing out weak economies with dollar
inflation. This, of course, has only been possible because the dollar's
strength is perceived to be greater than it really is.
Modern day globalists would like us to believe they invented
globalism. Yet all they are offering is an unprecedented plan for
global power to be placed in the hands of a few powerful special
interests.
Globalism has existed ever since international trade started
thousands of years ago. Whether it was during the Byzantine Empire or
the more recent British Empire, it worked rather well when the goal was
honest trade and the currency was gold. Today, however, world
government is the goal. Its tools are fiat money and the international
agencies that believe they can plan globally, just as many others over
the centuries believed they could plan domestically, ignoring the fact
that all efforts at socialism have failed.
The day of reckoning for all this mischief is now at hand. The dollar
is weakening in spite of all the arguments for its continued strength.
Economic law is overruling political edicts. Just how long will the
U.S. dollar and the U.S. taxpayers be able to bail out every failed
third-world economy and pay the bills for policing the world? U.S.
troops are now in 140 nations around the world. The answer is certainly
not forever and probably not much longer, since the world economies are
readjusting to the dislocations of the past 30 years of mismanagement
and misallocation of capital characteristic of fiat money.
Fiat money has been around for a long time off and on throughout
history, but never has the world been so enthralled with the world
economy being artificially structured with paper money and with a total
rejection of the anchor that gold provided for thousands of years.
{time} 1615
Let there be no doubt, we live in unprecedented times and we are just
beginning to reap what has been sown the past 30 years. Our government
and the Federal Reserve officials have grossly underestimated the
danger.
Current concerns are expressed by worries about meeting the criteria
for a government-declared recession and whether a weaker dollar would
help. The first is merely academic, because if you are one of the many
thousands who have been laid off, you are already in a recession.
The second does not make a lot of sense unless one asks, compared to
what? The dollar has been on a steady course of devaluation for 30
years against most major currencies and against gold. Its purchasing
power in general has been steadily eroded.
The fact that the dollar has been strong against Third World
currencies and against most major currencies for the past decade does
not cancel out the fact that the Federal Reserve has systematically
eroded the dollar's value by steadily expanding the money supply.
Recent reports of a weakening dollar on international exchange markets
have investment implications, but do not reflect a new policy designed
to weaken the dollar. This is merely the market adjusting to 30 years
of systematic monetary inflation.
Regardless of whether the experts demand a weak dollar or a strong
dollar, each inevitably demands lower interest rates, hoping to spur
the economy and save the stock market from crashing. But one must
remember that the only way the Federal Reserve can lower interest rates
is to inflate the currency by increasing the money supply and by
further debasing the currency.
In the long term, the dollar is always weakened even if the economy
is occasionally stimulated on a short-run basis. Economic growth can
hide the ill effects of monetary inflation by holding some prices in
check, but it cannot prevent the overcapacity, the malinvestment which
causes the economic downturn.
Of course, the central bankers cling to the belief that they somehow
can prevent the ugly corrections known as ``recessions.'' Economic
growth, when artificially stimulated by money growth and low interest
rates, generates the speculation we have seen in the stock, bond and
real estate markets, along with the accumulation of excessive debt.
Once the need for rectifying the overcapacity is recognized by the
market, these imbalances are destined to be wiped out.
Prolonging the correction phase with the Fed's effort to reinflate by
diligently working for a soft landing, or even to prevent a recession,
only postpones the day the economy can return to sustained growth. This
is a problem the United States had in the 1930s and one that Japan has
experienced for more than a decade with no end in sight.
The next recession, from which I am sure we are already suffering,
will be even more pervasive worldwide than the one in the 1930s due to
the artificial nature of modern globalism with world paper money and
international agencies deeply involved in the economy of every nation.
We have witnessed the current and recent bailouts of Mexico, Argentina,
Brazil, Turkey, and countries in the Far East. While resisting the
market's tendency for correction, faith in government deficits and
belief in paper money inflation will surely prolong the coming
worldwide crisis.
Alan Greenspan made a concerted effort to stave off the 1991-1992
recession with numerous reductions in the Fed funds rate, to no avail.
The recession hit, and most people believe it led to George Bush's
defeat in the 1992 election. It was not that Greenspan did not try. In
many ways, the Bush people's criticism of Greenspan's effort is not
justified. Greenspan, the politician, would have liked to please the
elder Bush, but was unable to control events as he had wished.
This time around, however, he has been much more aggressive, with
half-point cuts, along with seven cuts in just the last 8 months, for a
total of 3 points cut in the Fed funds rate. But, guess what? So far,
it has not helped; stocks continue to slide and the economy is still in
the doldrums. It is now safe to say that Greenspan is pushing on a
string.
In the year 2000, bank loans and commercial paper were growing at an
annualized rate of 23 percent. In less than a year, in spite of this
massive influx of new credit, these loans have crashed to a rate of
minus 5 percent.
Where is the money going? Some of it probably has helped to prop up
the staggering stock market, but that cannot last forever. Plenty went
into consumption and to finance extravagant living. The special nature
of the dollar as the reserve currency of the world has permitted the
bubble to last longer. That would be especially beneficial to American
consumers. But in the meantime, understandably, market and political
forces have steadily eroded our industrial base, while our service
sector has thrived.
Consumers enjoyed having even more funds to spend as the dollars left
manufacturing. In a little over a year, 1 million industrial jobs were
lost, while saving rates sank to zero and capital investments
plummeted. Foreigners continue to grab our dollars, permitting us to
raise our standard of living, but unfortunately, it is built on endless
printing of fiat money and self-limiting personal debt.
The Federal Reserve credit created during the last 8 months has not
stimulated economic growth in the technology or the industrial sector,
but a lot of it ended up in the expanding real estate bubble, churned
by the $3.2 trillion of debt maintained by the GSEs,
[[Page H5444]]
the Government Sponsored Enterprises. The GSEs, made up of Fannie Mae,
Freddie Mac and the Federal Home Loan Bank, have managed to keep the
housing market afloat, in contrast to the more logical slowdown in
hotel and office construction. This spending through the GSEs has also
served as a vehicle for consumption spending. This should be no
surprise, considering the special status that the GSEs enjoy, since
their implied line of credit to the U.S. Treasury keeps their interest
rates artificially low.
The Clinton administration encouraged growth in housing loans that
were financed through this system. In addition, the Federal Reserve
treats GSE securities with special consideration. Ever since the fall
of 1999, the Fed has monetized GSE securities just as if they were U.S.
Treasury bills. This message has not been lost by foreign central
banks, which took their cue from the Fed and now hold over $130 billion
worth of United States GSE securities.
The Fed holds only $20 billion worth, but the implication is clear:
Not only will the Treasury loan to the GSEs, if necessary, since the
line of credit is already in place, but if necessary, Congress will
surely accommodate with appropriations as well, just as they did during
the savings and loan crisis of the 1970s.
But the Fed has indicated to the world that the GSEs are equivalent
to U.S. Treasury bills, and foreign central bankers have
enthusiastically accommodated, sometimes by purchasing more than $10
billion worth of these securities in 1 week alone. They are merely
recycling the dollars we so generously print and spend overseas.
After the NASDAQ collapsed last year, the flow of funds into real
estate accelerated. The GSEs accommodated by borrowing without
restraint to subsidize new mortgages, record sales and refinancing. It
is no wonder the price of houses are rising to record levels.
Refinancing especially helped consumers to continue spending, even in
a slowing economy. It is not surprising for high credit card debt to be
frequently rolled into second mortgages, since interest on mortgage
debt has the additional advantage of being tax deductible.
When financial conditions warrant, leaving financial instruments such
as paper assets and looking for hard assets such as houses is
commonplace and is not a new phenomenon. Instead of the newly inflated
money being directed toward the stock market, it now finds its way into
the rapidly expanding real estate bubble. This, too, will burst, as all
bubbles do. The Fed, the Congress or even foreign investors cannot
prevent the collapse of this bubble, any more than the Japanese banks
were able to keep the Japanese miracle of the 1980s going forever.
Concerned Federal Reserve economists are struggling to understand how
the wealth effect of the stock market and real estate bubbles affect
economic activity and consumer spending. It should be no mystery, but
it would be too much to expect the Fed to look to itself and its
monetary policy for an explanation and assume responsibility for
engineering the entire financial mess we are in.
A major problem still remains. Ultimately, the market determines all
values, including all currencies. With the current direction of the
dollar, certainly downward, the day of reckoning is fast approaching. A
weak dollar will prompt dumping of GSE securities before Treasuries,
despite the Treasury's and the Fed's attempt to equate them with
government securities. This will threaten the whole GSE system of
finance, because the challenge to the dollar and the GSEs will hit just
when the housing market turns down and defaults rise.
Also a major accident can occur in the derivatives market, where
Fannie Mae and Freddie Mac are deeply involved in hedging their
interest rate bets. Rising interest rates that are inherent with a weak
currency will worsen the crisis.
The weakening dollar will usher in an age of challenge to the whole
worldwide financial system. The dollar has been the linchpin of
economic activity, and a severe downturn in its value will not go
unnoticed and will compound the already weakening economies of the
world.
More monetary inflation, even if it is a concerted worldwide effort,
cannot solve the approaching crisis. The coming crisis will result from
fiat money and the monetary inflation. More of the same cannot be the
solution. Pseudo free trade, managed poorly and driven by fiat money,
is no substitute for true free trade in a world with a stable commodity
currency, such as gold.
Managed trade and fiat money historically have led to trade wars,
which the international planners pretend to abhor. Yet the trade war is
already gearing up, and the WTO, purported to exist to lower tariffs,
is actually the agency that grants permission for tariffs to be applied
when complaints of dumping are levied.
We are in the midst of a banana, textile, steel, lumber and tax war,
all managed by the WTO. When cheap imports hit our market, it is a good
deal for our consumer, but our manufacturers are the first to demand
permission to place protective tariffs on imports. If this is already
occurring in an economy that has been doing quite well, one can imagine
how strong the protectionist sentiments will be in a worldwide
slowdown.
Congress is starting to realize that the budget forecast based on an
overly optimistic growth rate of 3 percent is way off target, and even
the pseudo surpluses are soon to be eliminated.
Remember, the national debt never went down with the so-called
surpluses. The national debt is currently rising at more than $120
billion on an annualized rate, and is destined to get worse. Our dollar
problem, which affects our financial and budgetary decisions,
originated at the Fed with our country's acceptance of paper money 30
years ago. Federal Reserve officials and other government leaders
purposely continued to mislead the people by spouting the nonsense that
there is no evidence of inflation as measured by government rigged
price indices.
Even though significant price increases need not exist for monetary
inflation to place a hardship on the economy, stock prices, housing
prices, costs of medical care and education and the cost of government
have all been rising at very rapid rates. But the true inflation,
measured by the money supply, is rising at a rate greater than 20
percent as measured by MZM. This fact is ignored.
The deception regarding price increases is supported to reassure us,
and may do so for a while. The Fed never admits it, and the Congress
disregards it out of ignorance, but the serious harm done by
artificially low interest rates leading to malinvestment, overcapacity,
excessive debt and speculation are the distortions that always
guarantee the next recession.
Serious problems lie ahead. If the Fed continues with the same
monetary policy of perpetual inflation and the Congress responds with
more spending and regulations, real solutions will be indefinitely
delayed. The current problems hopefully will cause us as a nation and,
in particular, Congress to reassess the policies that have allowed the
imbalances to develop over these last 30 years.
Some day, stable money, based on the gold standard, must be
reconsidered. Stable money is a constitutional responsibility of
Congress.
{time} 1630
The Federal Reserve Board's goal of stable prices, economic growth
and interest rates, through centralized economic planning, by
manipulating money and credit, is a concoction of the 20th century
Keynesian economics. These efforts are not authorized by the
Constitution and are economically detrimental.
Economic adjustments would not be so bad, as many mild recessions
have proven, except that wealth is inexorably and unfairly transferred
from the middle class and the poor to the rich. Job losses and the
rising cost of living hurt some more than others. If our course does
not change, the entire middle class prosperity can be endangered, as
has happened all too often in other societies that pursued a false
belief that paper money could be satisfactorily managed.
Even the serious economic problems generated by a flawed monetary
system could be tolerated, except for the inevitable loss of personal
liberty that accompanies government's effort to centrally plan the
economy through a
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paper monetary system and ever-growing welfare state. Likewise, an
imperialistic foreign policy can only be supported by inflation and
high taxation.
This policy compounds the threat to liberty because, all too often,
our leaders get us involved in overseas military adventurism in which
we should have no part. Today, that danger is greater than ever as we
send our dollars and our troops hither and yon to areas of the world
most Americans have no knowledge or interest in. But the driving force
behind our foreign policy comes from our oil corporations,
international banking interests, and the military industrial complex
which have high-stake interests in the places our troops and foreign
aid are sent.
If, heaven forbid, the economy sinks as low and for as long as many
free market economists believe, what policy changes must we consider?
Certainly, the number one change ought to be to reject the ideas that
created the crisis, but rejecting old ways that Congress and the people
are addicted to is not easy. Many people believe that government
programs are free. The clamor for low interest rates and, therefore,
more monetary inflation, by virtually all public officials and
prominent business and banking leaders is endless. And, the expectation
for government to do something for every economic malady, even if ill-
advised government policy had created the problem in the first place,
drives this seductive system of centralized planning that ultimately
undermines prosperity. A realization that we cannot continue our old
ways may well be upon us, and the inflating, taxing, regulating, and
the centralized planning programs of the last 30 years must come to an
end.
Only reigning in the welfare-warfare state will suffice. This
eliminates the need for the Fed to monetize the debt that politicians
depend on to please their constituents and secure their reelection. We
must reject our obsession with policing the world by our endless
foreign commitments and entanglements. This would reduce the need for
greater expenditures, while enhancing our national security. It would
also remove pressure on the Federal Reserve to continue a flawed
monetary policy of monetizing endless government debt.
But we must also reject the notion that one man, Alan Greenspan, or
any other chairman of the Federal Reserve, can know what the proper
money supply and the proper interest rates ought to be. Only the market
can determine that. This must happen if we ever expect to avoid
continuous and deeper recessions and to get the economy growing in a
healthy and sustainable fashion. It also must happen if we want to
preserve free market capitalism and personal liberty.
The longer the delay in establishing a free market and commodity
currency, even with interrupted blips of growth, the more unstable the
economy and the more difficult the task becomes. Instead, it will
result in what no one wants: more poverty and political turmoil.
There are no other options if we hope to remain a free and prosperous
Nation. Economic and monetary meddling undermines its principles of a
free society. A free society and sound money maximize production and
minimize poverty. The responsibility of Congress is clear: avoid the
meddling so ingrained in our system and assume the responsibility all
but forgotten, to maintain a free society, while making the dollar,
once again, as good as gold.
Now, I want to close with a quote from James Madison from The
Federalist Papers, because the founders of this country faced the
dilemma of runaway inflation with the continental currency and that is
where our slogan comes from: ``It is not worth a continental.'' This
was a major reason why we had the constitutional convention because
they knew and understood the evils and the disastrous effects of what
paper money could do to a society. These are the words of James
Madison. He says, ``The extension of the prohibition to bills of credit
must give pleasure to every citizen in proportion to his love of
justice and his knowledge of the true springs of public prosperity. The
loss which America has sustained since the peace, from the pestilent
effects of paper money on the necessary confidence between man and man,
on the necessary confidence in the public councils, on the industries
and morals of the people, and on the character of republican
government, constitutes an enormous debt against the States chargeable
with this ill-advised measure.''
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